It’s your money. As an intelligent, enterprising person, you could manage your investments on your own, no doubt about it. However, whether you do actually manage them — or want to — is another matter entirely.
Regardless of whether you’re flying solo, using the services of an investment professional, or both, you should be able to answer the following questions clearly and concisely:
- What is your strategy in specific terms?
- How is this strategy being implemented?
- How do the items in your portfolio contribute to your strategy?
- How are performance outcomes being monitored, reported, and acted upon?
- How are you paying for the services?
- Are costs and compensation clear, obvious, transparent, and specifically reported/disclosed?
Last things first…
All investments have a cost, and all portfolios cost money in some shape or manner. For instance, say that you get a “no-load” mutual fund. If you do this, you’ll avoid the initial commission a broker would charge. However, you’ll still incur all of the annual operating costs associated with the fund, which can be considerable. An overseas small company fund (typically more expensive) could push 3% per year in fees, which is a lot. Does this mean you shouldn’t own one of these investment vehicles? Of course not, but “no-load” can still equal high-cost. You need to be aware of what these costs might be.
In the same vein, let’s say you’ve owned mutual funds through a brokerage for years. You haven’t bought anything new for a while, so there appear to be no costs. Not true! Mutual funds always have ongoing costs and usually pay an ongoing commission to the broker over time, known as “trailing fees” or “trails”. The amount varies, but is often 0.25% per annum, or $250 on each $100,000 invested. Other operating costs are then added on top of this, so it’s really far from free. This is all disclosed in the fund’s prospectus, of course — which I’m sure you read cover-to-cover last time it came in the mail, right? I jest, of course.
Next item — performance. Just because a portfolio underperforms the Market for a particular interval of time does not necessarily mean that something is wrong. If it’s an even 50/50 split between stocks and bonds and you compare only to the S&P 500, it’s really not an accurate comparison. You need to compare to a 50/50 composite. Even then, this might still be a case of “apples to oranges”; however, you do need to get some sort of measure, whether you are a do-it-yourself investor or working with an advisor. At minimum, you should know the following:
- Point-to-point (quarterly, year-to-date, etc.) returns
- Cash inflows/outflows per quarter
- Index comparisons; your account vs. stock & bond indices
Finally: strategy and implementation. These will vary enormously from one person, business, or entity to another. The key here is clarity and specificity, not merely “I want the account to get bigger.” Well, of course — who doesn’t? A more specific, well-defined goal would be something like, “I want my portfolio to provide financial security and an income stream for my special-needs child.” Having a concrete frame of reference will immediately start to define what kind of investment offerings should and should not be in your portfolio.
If you cannot answer these questions with relative ease, you should begin looking for answers. Give me a call/email and I’ll help you get started.
All the best,
